Before the recent tragedy, I had written a mildly entertaining review of fighter industry consolidation, based on the recent A-12 lawsuit decision. Sadly, that monthly letter will have to wait. The world has changed. I hope you, like me, were fortunate enough to not lose anybody they know. Please spare a thought for those who did.

I guess we all have to get back to our jobs (although once again, us Washingtonians are reminded that no matter how important-sounding our jobs are, we are about 1% as useful as volunteer firemen). My job is to write about aviation markets. From my standpoint, many of the reports I write need revising. And the news is both fairly good and potentially very bad. But first, I’d like to describe the world as I see it.

Boeing’s Alan Mullaly once sent me a copy of a book called The Lexus And The Olive Tree. I’m sure he sent copies to many people. I’m sure hundreds of other export-oriented Western executives sent that book, or the similar Jihad Vs McWorld to literally thousands of recipients.

To be honest, I never read the book. But I did read the reviews. The idea was very simple and direct: the world is divided between the old and new ways of doing things. The Lexus symbolized globalization, technology, business, and progress. The Olive Tree symbolized traditional customs, religion, tribalism, and regionalism. Most of the world’s conflicts resulted from a clash of these two civilizations. Boeing, of course, was on the side of the Lexus. The interesting thing about the thesis was that it implied a relatively low level of conflict—more than a debating society, yet less than total war.

Yet we are now faced with the prospect of a total war, based on this very profound chasm between two worldviews. We basically have no choice but to strike back militarily, and if our past performance is any example, the counterstrike might not be particularly well thought out or successful. As T.E. Lawrence once said, fighting guerillas with conventional means is like eating soup with a knife—messy, and ultimately unproductive. When you think about it, Osama Bin Laden is merely the latest in a long line of chosen enemies—Fidel Castro, Moammar Qaddafi, Saddam Hussein. They all have one thing in common—they are still in power.

Given the sheer insanity of the opposition this time, our counterstroke is likely to result in a cycle of violence. It could be reminiscent of (but much worse than) the late Reagan period, when terrorist bombings in Europe led to air strikes against Libya, which led to Lockerbie, which led to something of a compromise. And given the long list of “usual suspects,” this could be a low/medium-level multi-front war. There is a disturbingly good chance that the enemy has “sleeper” units here, waiting to be activated in the event of conflict.

All this to say that the civil side recovery will depend on military and political events, not on economics or even human psychology. If the violence ends soon, then we could see a reasonably brisk recovery, after about 6-12 months of pain. If there is a durable cycle of violence, we’re talking about the end of the commercial aviation industry as we know it.

The markets have only just reopened, and already there is serious trouble. Airlines are hemorrhaging cash, with no hope in sight. This is going to clobber jetliner deliveries, starting in late 2002, at the latest (let me know if you want the latest spreadsheet—I’ll send it when it’s done). The only hope is government support, which will undoubtedly become a Faustian bargain, and really won’t trickle down to the manufacturers very much, if at all. And the longer this lasts, the more government will become involved, until we creep back to pre-deregulation days.

Regarding specific aircraft, narrowbodies will be hit the hardest. They were already in an oversupply situation, and they have high levels of leasing company exposure on their order books (the lessors are reporting a downturn already too). While a high-end passenger exodus could benefit corporate jets, that segment will face economic and safety-related capacity constraints of its own.

Crass as it is to talk of good news, there is no denying that defense spending is going to rise. If this is a short conflict, we will see a Kosovo-sized increase, but a longer conflict could see a more sizeable and durable increase. Assuming the latter is more likely, carrier aviation is going to benefit. As ever, carriers are useful for a full spectrum of conflict, from airspace control to diplomacy to retaliatory strikes. The F/A-18E/F, and possibly JSF, will benefit. An even bigger beneficiary could be the V-22. It’s difficult to imagine any scenarios in which the US wouldn’t benefit from that capability. Also, guided munitions will do well—they get expended quickly, and a fear of terrorism should encourage stockpiling of weapons at organic military unit levels.

Where will the money come from? Well, in times like these fiscal hawks suddenly change their colors, and no civil government trust fund can’t be raided in the name of national security. With any luck, NMD will now be viewed as an expensive diversion, freeing enough cash to make JSF happen more or less on schedule. Of course, the reality might prove different—any scheme to protect the homeland will resonate with voters, no matter how irrelevant.

Regarding this supplement, forecasting at this point is more than ever a “best guess” effort. Again, we don’t know what will happen next. But best guess forecasting is all we can do, and I’ve tried to keep a likely consistent scenario in mind as I’ve revised these reports. I’ve updated the F-22 and C-17, both of which will benefit considerably (my C-17 numbers were already pretty optimistic, so there has been little material increase). The F-22 looks much safer than before, with an F-22E version (probably with the new small diameter bomb) now a likely candidate as a stealthy strike aircraft for high value targets. And the 767 report reflects the likelihood that Sonic Cruiser will be deferred (if it goes ahead at all). Please note that I have deferred updating the Rafale report, as I am due to receive news on the program after our publication deadline. Let me know if you have any other priority requests.